Buy now, pay later plans allow shoppers to pay for purchases in four or more installments, often interest-free. Dubbed BNPL for short, these point-of-sale installment loans have become increasingly popular both online and in stores.
In a 2022 study, the Consumer Financial Protection Bureau (CFPB) reported that the number of loans issued by five leading BNPL providers grew 970% between 2019 and 2021, from 16.8 million to 180 million. Though BNPL plans have some attractive features, it's important to understand what they can mean for your credit score.
Key Takeaways
- Buy now, pay later plans offer a convenient way to pay for purchases online or in stores.
- The majority of BNPL services allow consumers to pay in four installments.
- Many BNPL services don't require a hard credit check for you to qualify for them, so applying won't hurt your credit score.
- If a BNPL provider reports your account activity to the credit bureaus, making on-time payments can help you build a good credit history and a solid credit score.
- However, BNPL can negatively affect your credit score if you fail to make payments on time.
Buy Now, Pay Later Basics
Buy now, pay later apps provide consumers with short-term financing for their purchases. When someone shops online or in a store, they may have the option to use BNPL at the checkout. If they opt for one of these point-of-sale loans, they'll be asked to make an initial down payment on the purchase. The remaining balance is then spread out over three or more installments.
These agreements differ from layaway plans, rent-to-own, and credit cards in a variety of ways, including:
- Purchase and spending limits
- Payment structures
- Costs (interest and fees)
- The major retailers at which BNPL is accepted
- Approval requirements
Buy now, pay later plans can have flexible spending limits, which are typically set by the platform that provides the service rather than by the retailer. Afterpay, for example, gives shoppers an estimated spending limit that can change over time based on how they use their accounts. Klarna doesn't specify a preset spending limit but instead considers the amount of the purchase, the time of day, and the length of time the customer has been using the service.
Payments are usually split into four installments, though the number may vary depending on the BNPL service and the size of the purchase. In terms of cost, many point-of-sale installment loans are interest-free, which can make them more attractive than a credit card with a high annual percentage rate (APR).
Note
Though many buy now, pay later plans are interest-free, some aren't. So it's worth finding out before you sign up.
Does BNPL Require a Credit Check?
Ordinarily, consumers who apply for loans or other forms of credit are subject to a hard credit inquiry, where lenders request and review the consumer's credit reports before making a decision. Each hard inquiry can knock a few points off your credit score, at least briefly. Soft credit inquiries, on the other hand, have no impact.
Some BNPL providers conduct a hard credit check when you apply, while others don't. The list of providers that use soft or no credit checks includes:
- Affirm
- Afterpay
- Klarna
- PayPal
- Zip (previously Quadpay)
A hard credit check may be required if you're using a different financing option offered by a buy now, pay later service, such as an installment loan or a credit card. Otherwise, you may be able to avoid a hard credit check—and any harm to your credit score—with BNPL financing.
Tip
Checking your own credit reports is considered a soft credit pull and won't damage your credit score. You can request your credit reports at AnnualCreditReport.com.
Do BNPL Services Report to the Credit Bureaus?
Credit accounts, including loans and credit cards, are typically reported to the credit bureaus by their lenders. The type of information that goes into your credit report will include:
- Payment history
- Credit limits
- Balances owed
Those are some of the most heavily weighted factors used in calculating your credit scores. But this information isn't reported automatically; lenders have to share it with the credit bureaus, and not all do. According to the 2022 CFPB report, BNPL plans generally don't report payment information to the credit bureaus.
If a buy now, pay later provider chooses to report your account activity to one or more of the three major credit bureaus, that information can show up on your credit reports, and in turn, affect your credit score.
Sezzle, for example, offers a buy now, pay later option that includes credit bureau reporting for consumers who opt into it. If they make all of their payments on time, that will help them build a good credit history, but if they're late in paying, it could damage their credit score.
BNPL plans like Afterpay, on the other hand, don't report payment history to the credit bureaus at all, so it won't affect credit scores one way or the other.
Consumers who hope to use BNPL as a credit-building tool will want to choose a service that reports to the credit bureaus and, of course, keep up with their payments. Consumers who know from past experience that they don't always pay their bills on time may want to choose one that doesn't.
What Happens if You Miss Payments?
Buy now, pay later contracts assume that borrowers will make the required installment payments as agreed. Missing a payment can trigger late fees, and missing multiple payments could result in an account being sent to collections. Even if your BNPL lender doesn't ordinarily report your account activity, the debt collector may.
Late payments on your credit report can drag down your credit score, and the longer an account is past due, the more damaging it can be. Negative information, such as late payments, can stay on credit reports for up to seven years.
How Do Buy Now, Pay Later Plans Make Money if They Don't Charge You Interest?
Buy now, pay later plans make their money from merchants, typically as a percentage of what you spend or as a flat fee per transaction.
Do Buy Now, Pay Later Plans Have the Same Consumer Protections as Credit Cards?
Buy now, pay later plans have some consumer protections, but they are not as comprehensive as those on credit cards. For example, the Consumer Financial Protection Bureau notes that "BNPL companies don'’t offer the same dispute protections as credit cards if the item you purchase is faulty or a scam. Returning merchandise bought with BNPL can sometimes be complicated. The BNPL company may hold you responsible for the total cost of a purchase even after you've returned the product, so be sure to read and understand the merchant’s specific return policies."
Is Buy Now, Pay Later Safe?
Buy now, pay later plans have generally proven to be safe, but there are some legitimate concerns about them. One is the danger that they may encourage some consumers to overspend. Another is that BNPL companies can collect a great deal of information on their customers, raising privacy issues.
The Bottom Line
Buy now, pay later plans can be convenient for consumers, but they do little or nothing to help them build a good credit score. However, if the consumer fails to pay, and their account is turned over to a debt collector, that can do their score serious damage. So the bottom line is that if you use these services, make sure you can, and do, pay your bill on time.
